Shares in ASX-listed gold miners have been killing it in 2017 which is a welcome change after years of underperformance.
However before jumping into gold mining shares today, here are three things that you should be aware of:
1. Gold miners have been hording cash and slashing debt
Low costs combined with higher production volumes and the rising gold price has been an explosive mix for cash flows this reporting season.
As a result we are starting to see gold miners de-risking their balance sheets by slashing debt and topping up their cash balances.
Newcrest Mining Limited (ASX: NCM) for example claimed net debt reductions of 29% by lifting its cash (and equivalents) by more than eight times year-on-year from US$53 million to US$492 million.
Meanwhile Evolution Mining Ltd (ASX: EVN) was able to accelerate debt repayments in the 2017 financial year and improve its cash position (though total debt actually grew as the company borrowed to acquire an interest in a new mine).
2. Evolution Mining is probably the lowest cost producer
A quick review of the major ASX listed gold producers suggests that Evolution Mining is probably the king of low cost production for 2017.
The company is Australia's second largest gold producer and these economies of scale helped to drive All-In Sustaining Costs (AISC) to a record low of $905 per ounce for the full year.
This was a fraction below the $907/oz reported by St Barbara Ltd (ASX: SBM) and about 10% below both Newcrest Mining and Northern Star Resources Ltd (ASX: NST).
3. Capital expenditure across the industry could be about to spike
Low cost, lean operations have been great for margins, but it has also slowed spending on new projects and development required to sustain gold reserves.
In a company presentation earlier this month Northern Star Resources pointed out that the reserve life of the top five global gold producers has declined by 37% since 2012.
Now that companies are making money again I would expect to see increasing allocations to capital expenditure.
Newcrest Mining has indicated its intention to lift capital expenditure in FY18 to as much as US$740 million, from US$582 million in 2017.
If you're considering adding gold producers to your portfolio today, I would suggest looking closely at how the company plans to sustain itself going forward – and what that may cost – before buying.
